Hair Of The Dog

By Colin Twiggs
January 24, 2008 8:00 p.m. ET (12:00 a.m. AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment advice. Full terms and conditions can be found at Terms of Use.

Government Response

The Fed cut the fed funds to 3.5% and the Bush administration announced agreement on an economic stimulus package including tax rebates for individuals and business incentives for investment in new equipment. With Federal Government debt already at $9 trillion they will have to borrow the money. That fixes the underlying problem about as effectively as three fingers of scotch fix a hangover — or mailing your bank manager a check to settle your overdrawn bank account.

Stock Markets

The rally on the S&P 500 and the Dow is typical of a bear market rally: a sharp reaction accompanied by heavy volume. Volume reflects the number of stockholders taking the opportunity to sell down their positions. Be careful of confusing hope with probability: the index is likely to meet resistance at 1400 followed by a sharp reversal.

sp 500

The FTSE 100 similarly, is likely to test the former primary support level of 6000.

ftse 100 below support at 6000

The Shanghai Composite index broke through support at 4800 to join other markets in a primary down-trend.

shanghai composite index crosses support at 4800

Treasury Yields

Ten-year treasury yields have fallen sharply as funds flow from stocks into bonds.

10 year treasury yields and yield differential with 3 month treasury bills

The yield differential recovered as short-term yields fell even faster.

3 month treasury yields

Financial Markets

Commercial paper rates fell sharply in response to the rate cut by the Fed. The fall below the new fed funds rate of 3.5% shows that further rate cuts are expected. Three-month treasury bill yields also fell sharply, the continued wide spread warning of further instability in financial markets.

commercial paper rates compared to federal funds rate and treasury bills

Bank Credit

One (short-term) positive aspect is that bank credit continues to grow at above 10 per cent.

bank credit growth

Commercial paper markets found some support, with the level stabilizing around $1.8 trillion. Further contraction would squeeze bank credit.

commercial paper outstanding balances

Consumer Credit

Consumer credit growth remains at a precarious 5 per cent. Further falls would sound a recession warning.

consumer credit growth

Jonathan Wright's recession prediction model is displayed for academic interest only, having failed to account for the damage caused by a negative yield curve in a low interest rate environment. The model shows probability of a recession (in the next four quarters) as a low 9 percent.

wright's recession prediction model

If the government is really bent on protecting the public's earnings, it should begin at home with the purchasing power of the dollar............ If any company listed on the Stock Exchange had engaged in equivalent financial practices, its directors would be facing prosecution by the SEC.

~ Bernard Baruch:
My Own Story.

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